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Turkey Keeps Key Rate Unchanged as Inflation Backlash Builds

© Reuters.

(Bloomberg) — Turkey’s central bank kept its benchmark interest rate unchanged for a second month on Thursday, as President Recep Tayyip Erdogan’s government struggles to contain price surges that could threaten his two-decade rule.  

The Monetary Policy Committee held its one-week repo rate at 14% as forecast by all 22 analysts surveyed by Bloomberg. Turkish inflation climbed to 48.7% last month, pushing the nation’s yield when adjusted for inflation to almost -35%, the lowest by far among emerging market peers.

The lira was little changed and trading 0.2% lower at 13.6230 per dollar at 2:01 p.m. local time.

Turkey’s aggressive rate cuts in late 2021 fueled a collapse in the lira, leaving the nation more exposed than peers to recent global price shocks. Erdogan is prioritizing growth at a time many emerging market peers are tightening monetary policy to counter price gains, reasoning — in a departure from economic orthodoxy — that higher borrowing costs fuel inflation.

Boxed in by Erdogan’s demands, authorities have switched their focus away from rates. The central bank introduced incentives for a new savings scheme to stabilize the currency, while the government slashed value-added tax on staple foods in an effort to curb price gains. 

Treasury and Finance Minister Nureddin Nebati has predicted inflation will gradually slow this year as the economy attracts more dollar inflows from tourism over the summer. Inflation expectations for the end of the year jumped to 34.06% from 29.75%, according to the central bank’s February survey of market participants.

Rising living costs are already sapping Erdogan’s political support ahead of 2023 national elections.

The central bank’s steps to protect lira deposits and the government’s tax cuts aren’t sufficient to fight inflation, Deutsche Bank economist Fatih Akcelik said before the rate decision. “We maintain our view that the markets will force the central bank to hike its policy rate at some point this year,” he said.

Turkey’s Statistical Institute will publish gross domestic product data for the fourth quarter of 2021 and the full year on Feb. 28. It will publish February inflation data on March 3.

©2022 Bloomberg L.P.

Turkey Keeps Key Rate Unchanged as Inflation Backlash Builds

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